GlaxoSmithKline Lines Up Five Major 2007 Launches; Operating Profit Gains 15% in 2006

GlaxoSmithKline pleased and reassured investors with a solid performance for 2006 and earnings guidance that was relatively optimistic, given the pressures facing the company this year. Pharmaceutical sales in the United States were the main engine of growth, offsetting a muted showing in Europe. The downside of this trend was exposure to a relatively weak dollar, which dampened fourth-quarter growth in particular.

Fourth-quarter (Q4) turnover was just 1% higher at £5.96 million, continuing the decline that had seen turnover growth drop to 3% in the third quarter from 11% in the second quarter. Stripping out currencies, however, took the Q4 sales increase up to 8% while Q4 growth in U.S. sales was 15% at constant exchange rates but only 4% when translated into sterling. Operating profit for the quarter was flat, according to Global Insight's calculations, at £1.6 billion.

The currency effects were less pronounced over the full year, with group turnover growing by 7% (or 9% at constant exchange rates (CER)) to £23.2 billion. Operating profit (Global Insight calculation) was 15% higher at £7.50 billion, reflecting GSK's continuing tight management of costs. While research and development (R&D) expenditure was up by 10% for the year, sales costs increased by only 5% and selling, general and administrative expenses stayed level at £7.26 billion, helped by lower legal and restructuring charges. GSK also beat its own forecast at the third-quarter stage of EPS growth in the mid-teens (CER) for 2007. Earnings per share came through at 95.5 pence for the full year, 19% above 2005 at CER.

Pharmaceutical sales rose by 9% at constant exchange rates to £20.1 billion in 2006, driven mainly by a 16% sales gain in the U.S. market. Generic competition with anti-epileptic Lamictal (lamotrigine), migraine treatment Imigran (sumatriptan) and anti-emetic Zofran (ondansetron)—along with continued price cut—held European sales growth to 1% for the year. Strong performances in Europe from the combination anti-asthmatic Seretide (salmeterol/fluticasone propionate, sales +10% at CER) and Avandia/Avandamet (rosiglitazone) antidiabetics (+13%, + >100%) helped to soften these blows. Full-year sales in international markets were 6% higher, with Japanese sales rising by 8%.

In product terms, Seretide/Advair delivered sales growth of 11% overall, while the Avandia family made a strong impression across all geographical regions; sales of the diabetes product group were up by 24% at CER in the United States, 40% in Europe and 19% in international markets. Another key contributor was GSK's fast-developing vaccines business, where sales jumped by 23% last year. U.S. vaccine sales were 40% higher than in 2005 and European sales grew by 20%.

Outlook and Implications

In 2007 GSK will be facing major generic competition in the United States to Zofran and the 300 mg formulation of long-acting antidepressant Wellbutrin XL (bupropion), which accounts for 60% of XL sales. Avandia will also be under pressure from new antidiabetic entries in that market. Accordingly, GSK's guidance for EPS growth in 2007 is a relatively modest 8-10% at CER, although analysts had been expecting worse.

The U.K. company is also confident that an impressive R&D pipeline, with more than 10 new products added to late-stage development over the last 12 months and more than 30 significant product opportunities either in Phase III trials or registration, will help it to ride out the bumpy patch. Notably, it has five major new product launches scheduled for this year: breast cancer treatment Tykerb, which is expected to hit the market in mid-2007; cervical cancer vaccine Cervarix (U.S. filing by April, European/international launches expected in the second half of 2007); Allermist/Avamys, a new intranasal steroid for seasonal and perennial allergic rhinitis (U.S. launch scheduled for the first half of 2007); triple cardiovascular therapy Coreg CR (to be launched in the first quarter of 2007); and migraine treatment Trexima (launch expected by second half of 2007).

GSK has also been busy with a flurry of acquisitions, collaborations and licensing deals, the latest of which further bolstered the late-stage pipeline by bringing in gepirone ER, a treatment for major depression licensed from U.S. company Fabre-Kramer Pharmaceuticals, to be filed with the U.S. Food and Drug Administration (FDA) this quarter. Looking to the longer term, GSK is planning to set up three new centres of excellence for drug discovery, including one devoted to the increasingly desirable field of infectious diseases.

With all these efforts to build capabilities for organic growth, the U.K. pharma major seems in no hurry to enter the market for large-scale acquisitions. Nor does it feel a need to slash employee numbers in the manner of Pfizer and AstraZeneca; an expected announcement on staff cuts failed to materialise.